Is Marvell Technology Still a Good Buy?

A shrinking PC market, a potentially damaging lawsuit, and concerns regarding the networking business have failed to dent the spirits of Marvell Technology (NASDAQ: MRVL  ) investors this year. Marvell's up more than 80% so far in 2013. Its business has been improving and customers such as Western Digital (NASDAQ: WDC  ) , Seagate Technology, China Mobile, and others have proven to be important tailwinds.

In the news
However, Marvell has been in the news of late for two different reasons. First, it failed to get a $1.17 billion patent infringement lawsuit overturned after a judge ruled that it deliberately infringed Carnegie Mellon University's hard-drive patents. Second, it has been recently reported that private-equity firm Kohlberg Kravis Roberts has acquired a 5% stake in Marvell and is considering a leveraged buyout, according to Bloomberg. 

The bigger headache for investors is the first point. A fine of $1.17 billion is pretty huge for a company which has $1.73 billion in cash on the balance sheet. However, Carnegie Mellon is of the opinion that Marvell's incorporation in Bermuda limits its exposure in U.S. courts. Marvell itself said in a regulatory filing that it has a strong case to get the verdict overturned and will now fight it out in the federal courts. 

Moreover, RBC Capital analyst Doug Freedman believes that even if Marvell has to pay up, the company could count on its surety bond providers to keep the business running. In addition, the possibility of a settlement cannot be ruled out either. Hence, it is quite evident that investing in Marvell comes with some serious risks. But those willing to take a chance and buy the stock might stand to gain given the improvements in the company's business.

Looking ahead
With Marvell scheduled to release its third-quarter results next week, now would be a good time to take a closer look. According to Yahoo!, Marvell's revenue for the most-recent quarter is expected to improve 11.5% over the prior-year period while adjusted earnings are expected to increase 25%. The expected revenue growth might not sound too impressive for a company that trades at almost 30 times earnings. However, a forward P/E of just 13.6 indicates that decent earnings growth is expected.

Marvell's storage segment would probably be an important growth driver. Accounting for almost half of the company's top line, this segment has been growing on the back of higher shipments for enterprise applications. In the second quarter, Marvell had a sequential jump of 80% in its enterprise shipments to its top North American client. 

This client is probably Western Digital, which accounted for 24% of Marvell's revenue in the previous fiscal year. Western Digital has been seeing robust growth in its enterprise business. In its recently reported quarter, Western Digital sold more high-margin products to enterprise customers. Western Digital management cited an IDC report over the previous conference call, pointing out that the enterprise SSD market is expected to triple by 2017 from $2.5 billion in 2012. 

Western Digital has been making various acquisitions to shore up its portfolio, such as sTec. According to AnandTech, sTec possesses over 100 patents related to SSDs. As such, Western Digital should be able to improve its position further, and probably give more business to Marvell. More importantly, 53% of Western Digital's revenue comes from non-PC applications, up from 35% in 2008. 

Moreover, Marvell has also witnessed a bump in business from Seagate. Seagate grew into a 10% customer in the previous fiscal year, which is again a positive as Marvell can now benefit from the two biggest players in the storage industry.

Moving ahead in mobile
Moving on from storage, Marvell's mobile segment is its next important growth driver. J.P. Morgan Securities had upgraded Marvell from "Neutral" to "Overweight" in September, and cited the sunny prospects of its mobile business as one of the reasons behind the move. Marvell has several illustrious clients such as China Mobile and Samsung for its mobile chips. Samsung used Marvell's dual-core chip platform in its 7-inch Galaxy Tab 3, while China Mobile also used it for its first branded smartphone. 

In addition, Marvell has been reported to win content at many Chinese smartphone makers such as ZTE. Moreover, Marvell's networking business might improve in the future driven by the growth of the passive optical network market, which is expected to grow at an annual rate of 23% till 2016, according to TechNavio. 

Final words
Marvell is not an easy investment to live with since the possibility of losing a large part of its cash balance as a result of the Carnegie Mellon lawsuit is always there. However, the company does seem to have a back-up plan in case it has to pay up.

Thus, investors who are looking to buy into Marvell's expected growth need to do so with caution. Also, the fact that Marvell has a dividend yield of 2% is another good reason why investors could consider overlooking the impending fine and invest in the company's expected growth.

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